II

INFLATION AND DEFLATION

I2 5

an objection to capital expenditure at the presenttime is like warning a patient who is wastingaway from emaciation of the dangers of excessivecorpulence.

The real difficulty hitherto in the way of aneasier credit policy by the Bank of England hasbeen the fear that an expansion of credit mightlead to a loss of gold which the Bank could notafford.

Now if the Bank were to try to increase thevolume of credit at a time when, on account ofthe depression of home enterprise, no reliancecould be placed on the additional credit beingabsorbed at home at the existing rate of interest,this might quite well be true. Since marketrates of interest would fall, a considerable partof the new credit might find its way to foreignborrowers, with the result of a drain of goldout of the Bank . Thus it is not safe for theBank to expand credit unless it is certain before-hand that there are home borrowers standingready to absorb it at the existing rates of interest.

This is the reason why the Liberal plan isexactly suited to the fundamentals of the presentposition. It provides the necessary conditionfor an expansion of credit to be safe.

It is, of course, essential that the Bank ofEngland should loyally co-operate with theGovernment’s programme of capital develop-ment, and do its best to make it a success. For,unfortunately, it would lie within the power ofthe Bank, provided it were to pursue a deflation-ary policy aimed at preventing any expansion